California Vows $30 Billion of Redevelopment Agencies’ Debt Will Be Repaid
Holders of almost $30 billion of California (STOCA1) redevelopment bonds will be repaid on time, even as the 425 agencies responsible for them are dissolved today, Finance Director Ana Matosantos said.
So-called successor agencies, mostly cities and counties, will inherit the obligations that financed road, sewer, lighting and affordable-housing projects to deal with urban blight, Matosantos and other state officials said yesterday, the end of the agencies’ 60-year existence.
Standard & Poor’s, Moody’s Investors Service and Fitch Ratings all warned that the credit ratings on $20 billion of California redevelopment bonds might be lowered because abolition of the agencies might affect debt repayments.
“It’s very difficult to figure out where you stand, which is a difficult place to be for a bondholder,” Craig Brothers, a managing director at Bel Air Investment Advisors in Los Angeles, said in a telephone interview. “The market’s become very illiquid with this kind of credit. You don’t really know where you stand in the capital structure.”
Matosantos and other Finance Department officials sought to allay concerns that closing the agencies might disrupt payments to bondholders or strain the budgets of municipalities that inherit the responsibility.
In seven or eight cases, including the redevelopment bonds issued for Los Angeles, no municipality has stepped up to assume the obligations, said Mark Hill, program budget manager for the Finance Department. The Los Angeles City Council voted in January not to take on the responsibility.
In such cases, Governor Jerry Brown will designate a successor, Hill said in a webcast yesterday.
“Those pledges will all be honored,” Hill said. “The statute requires that all of these obligations to pay those bonds transfer to the successor agencies.”
Redevelopment agencies captured a portion of property taxes in a designated area to subsidize projects intended to eliminate urban decay. They helped create an entertainment district in downtown San Diego, and spruce up a golf course in Palm Desert. The agencies had $29.8 billion in debt as of June 30, 2010, said Jacob Roper, a spokesman for state Controller John Chiang.
Scott Cottier, senior portfolio manager at OppenheimerFunds Inc., said his firms’ analysis of redevelopment agencies last year concluded that no matter what the governor and Legislature chose to do, the agencies’ bonds would still be paid in full.
With the agencies killed off, “the old bonds go up in value,” Cottier said in an interview. “The credit quality has gone up. These bonds are going to be money good.”
“As the three national ratings agencies pointed out, this is principally a question of cash flow,” McKenzie said. “Will the cash arrive in time to make the debt payments?”
On Jan. 28, a state court in Sacramento rejected an attempt by cities to block the state from taking the assets of the 399 active redevelopment agencies in California.
Brown and fellow Democrats inserted the law dissolving the redevelopment agencies into the package of bills that comprised the state’s budget for the fiscal year that began July 1.
Since some of that redevelopment money will go toward schools, it reduces the state’s obligation to fund education by an equal amount, H.D. Palmer, a Finance Department spokesman, said Dec. 29. That frees the state to spend the money for other purposes, he said.
Killing the agencies pours about $1 billion into the current spending plan, and $430 million in next year’s, the governor’s office has said.
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